Many of us that have a W-2, whether we work in the for-profit setting or in the nonprofit space, are familiar with various versions of the retirement plan such as the 401(k) plan or the 403(b) plan. Both plans can be leveraged by individuals that are interested in saving for their retirement by allowing them to make pre-tax and post-tax (on some occasions) contributions.
401(k) plans are offered by employers to their employees and the plan is not taxed until the employee withdraws that money (the Roth 401(k) plan withdrawals are tax-free). According to the IRS, a 403(b) plan, also knowns as a tax-sheltered annuity plan, is a tax-sheltered annuity plan, that is a “retirement plan for certain employees in public schools, employees of certain Code Section 501(c)(3) tax-exempt organizations and certain ministers.”
When it comes to the type of investments that individuals pursue with these plans, one typically hears about financial assets such as stocks, bonds, and mutual funds. For those that are interested in investing in real estate, they often defer towards investing in Real Estate Investment Trusts (R.E.I.T.). Beyond that, what many individuals are unaware of is that they could also purchase residential, commercial real estate, land, etc. as well – but it must be done through a self-directed IRA (SDIRA).
Self-Directed IRA Overview
The SDIRA is a type of individual retirement account that can hold a variety of alternative investments that is administered by a third party custodian. If an individual is interested in opening a SDIRA, they must find a qualified custodian that can offer that type of plan.
For those of you that have 401(k) or 403(b) and are interested in exploring a SDIRA, once you find a qualified custodian, you will be able to rollover that plan into a self-directed plan.
Self-Managed IRA vs. Self-Directed IRA
The terms self-managed IRA and self-directed IRA are often used interchangeably but they represent two different retirement accounts. With a self-managed account, the account holder is limited to the types of investments that they can invest in.
A self-directed IRA, on the other hand, enables an individual to place their money with a trusted custodian that then executes the investment requests put forth by the owner of the IRA – in this case, the custodian does not serve as a financial advisor.
High-level Benefits of a Self-Directed IRA
- You can control the assets/vehicles that you invest your money in
- You can invest in assets/vehicles that are not allowed by typical retirement account while also enjoying the regulatory and tax benefits that are associated with typical retirement accounts
- You can invest in real estate syndications that offer cash flow and appreciation
High-level drawbacks of a Self-Directed IRA
With an individual parking their money with a custodian, the investor is fully responsible for their investment decisions – which can be costly if the investor does not do their due diligence; you are solely responsible for all investments made with the self-directed IRA – as such, you are responsible for all penalties and negative consequences as well.
IRA Prohibited Transactions and Disqualified Person
A prohibited transaction involves any improper use of an IRA by the IRA holder and/or their beneficiaries and/or a disqualified person. It is important to understand what prohibited transactions, disqualified persons, and what investments are allowed and which are not allowed.
At the end of the day, only you can determine whether real estate investing is right for you. As a starting point, think through your personal circumstances and the aforementioned considerations. Know that every investment strategy will be different, that each investment strategy has its own pros/cons, and that all investing carries risk so as you continue to gauge whether you should invest in real estate, do your proper due-diligence.
Investing in Real Estate comes with several advantages. Navigating the real estate investing process can be difficult, but you do not have to do it alone. We are here to help.
How You Can Get in On the Action
Cash Flow Champs is a privately held investment company that focuses on acquiring and managing opportunistic and value-add multifamily real estate properties. The company specializes in repositioning well-located assets in emerging markets surrounded by positive demand drivers such as population growth and job growth.
Cash Flow Champs partners with entrepreneurs and busy working professionals interested in investing in real estate but who lack the time to navigate the process. Alongside our partners, we aim to bridge purpose and profits in a manner that allows us to improve the lives of the residents in our communities and the neighborhoods where we operate.
In the words of Robert Kiyosaki, the poor and the middle-class work for money. The rich have money work for them. If you are an individual that wants to build and maintain generational wealth through real estate, all while making a positive impact on the lives of residents and the communities where you invest, we’d love to explore opportunities for synergies.
Schedule a brief call with us so we can get to know you better, understand your life goals, and to determine where synergies may exist.
This information presented on this site is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities in the company or any related or associated company and is not a recommendation to pursue a specific investment opportunity. Any such offer or solicitation will be made only by means of the company’s confidential Offering Memorandum and in accordance with the terms of all applicable securities laws and other laws.